In for a Schilling, In for a Pound

By

Randall W. Forsyth

Updated Aug. 4, 2010 12:01 a.m. ET

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MONEY SEEMS TO MIGRATE to New England for the summer. It's been a long time since the Robber Barons of the Gilded Age headed for their "cottages" in Newport. Still, the Bushes return to Kennebunkport, the Kennedy clan heads to Hyannis while Martha's Vineyard hosts the Smart Set from the Obamas on down this time of year.

More recently, the less seemly side of wealth has been evident in New England. First, Sen. John Kerry was reported to have dodged some $500,000 of sales tax he would owe to the state he represents, Massachusetts, on the $7 million yacht he moored in neighboring Rhode Island.

The 2004 Democratic presidential nominee claimed that his New Zealand-built, 76-floot sloop was kept in Rhode Island for maintenance and chartering purposes. After the story broke, the spouse of the heir to Heinz ketchup fortune ponied up the half-mil to the Bay State that he would owe had he anchored his boat there.

As J. Pierpont Morgan counseled on the very subject of boat ownership, if you have to ask how much it costs, you can't afford it. Only Morgan's insight to the effect that "stocks will fluctuate" was more on target.

Rhode Island provides a tax environment for boaters as salubrious as Narragansett Bay because boating is integral to the Ocean State's economy. It's what financial services such as insurance and money management are to neighboring Connecticut.

But when Conn. Gov. Jodi Rell feted some New York-based hedge funds and pitched them on the advantages of locating in the Nutmeg State, the New York Post screamed on page one Tuesday, "Hedge Hogs!" (Barrons.com and the Post both are owned by
News Corp.
[ticker: NWSA], just in case anybody didn't know that already.)

Poaching businesses from neighboring states seems to be the norm in New England, though it's hardly confined to the Northeast corner of the U.S. But the extents to which they'll go seem out of the ordinary.

Consider the case of Curt Schilling, the former star major league pitcher. While he got the Philadelphia Phillies to the World Series in 1992 and helped win World Championships with the Arizona Diamondbacks in 2001, he's best known in these parts for pitching the Boston Red Sox to a World Series championship in 2004, breaking the fabled jinx that stretched back to 1918, when the Bosox traded Babe Ruth to the Yankees.

Schilling's courageous performance of pitching while sutures on his ankle seeped blood onto his sock has become part of baseball legend. Schilling also helped the Red Sox win the 2007 Series, but nothing could surpass his fabled 2004 performance that put his bloodied sock in Baseball's Hall of Fame.

Schilling now is retired from baseball and a businessman with a venture called 38 Studios LLC, which develops video games along the lines of the popular Worlds of Warcraft. These are massive, multiplayer online games, or MOOGs, in which thousands of players get involved. Some 11.5 million WOW subscribers pay $14.99 a month to play the game, money they evidently don't need for dates.

WOW is hugely popular but the field is extremely risky. Schilling's 38 Studios doesn't have a game on the market. As the Providence Journal quoted a Lazard Capital analyst, only 10% of MOOGs ever become successful, but those that do pay off big, as with WOW.

Given Rhode Island's 12% unemployment rate, there likely are a lot of guys sitting in their parents' basements playing video games. There also are a lot of grown-ups who need real jobs.

Schilling's outfit promises to provide 450 jobs at an average salary of $72,500. If his company goes bust, those jobs could cost the State of Rhode Island some $166,667 each, for however long they last. That money wouldn't come out of revenues from a thriving private concern, but redistributed from the pockets of the taxpayers of Rhode Island.

Consider the alternative of providing loan guarantees of $750,000 to 100 anonymous entrepreneurs instead of a single World Series hero. Maybe one of them would set up a boatyard to look after the yachts of Massachusetts senators or Connecticut hedge-fund managers. They would have to employ mechanics and launch-boat skippers, order parts from local marine suppliers, pump gas and diesel, and sell some ice for the boaters' refreshments. Then multiply that 100 times.

It's not as cool as bankrolling a future Hall of Famer. But it might create new jobs for the region instead of just poaching them from the state next door (Massachusetts, to its credit, refused Schilling's deal.) If most of 38 Special's employees simply move their stuff down I-95 to Rhode Island from Massachusetts, the net gain for the region is nil. But Rhode Island's taxpayers would be on the hook if Schilling's 38 Studios misfires.

While the former Bosox hurler was availing himself of capital courtesy of the State of Rhode Island, other entrepreneurs continue to struggle. The Wells Fargo/Gallup Small Business Index fell to a record low in July. Some 42% said it was "somewhat" or "very difficult" to obtain credit.

For those businesspeople who aren't World Series heroes, it's a bloody shame.

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